China autos: on the road to an electric future

With ambitious new targets for electric vehicles and vast opportunities in self-driving vehicles and the share-riding sector, China has the potential to reshape the global autos sector.

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On September 22, China’s Ministry of Information and Information Technology called for one in every 10 cars sold in the country to be all-electric, plug-in hybrid, or hydrogen-powered by 2019, and one in five by 2025; a move that will likely force global original equipment makers (OEMs) to share their technology with their Chinese partners or face losing out in the world’s largest car market1&2.

“Given the importance of Chinese sales, global OEMs such as Volkswagen (VW) may have no option but to invest in electric vehicle (EV) production in the country to maintain their market edge,” says Alessandro Rovelli, senior credit research analyst at Aviva Investors.

On November 16, VW confirmed plans to invest almost $12 billion in the technology by 2025, with the intention of selling 1.5 million new EVs per year3.

Such a transfer of technology could help the country kick start a new and potentially vast global industry that it could dominate, says Rovelli.

The global auto industry generates trillions of dollars4 in revenues per annum and, according to a majority of global auto executives surveyed by KPMG in its annual survey of the sector,China is expected to account for more than 40 per cent of sales by 20305. By that time EVs could make up around a quarter of annual auto sales, according to Bloomberg New Energy Finance6.

Apart from the economic gains, developing an EV industry would also help China curb high levels of pollution and its thirst for oil, for which China is the world’s biggest importer7.

A natural advantage

China appears well placed to assume a market-leading role in EVs. An extensive high-speed rail system and increasing urbanisation skew car journeys towards shorter driving distances.

The ability of the state to direct economic development also helps. Beijing has ordered state-owned Chinese power companies to speed up the installation of charging stations. As of December 2016, China had 300,000 charging stations8, dwarfing the US, which had just 16,000 points in early 20179.

The government’s drive to electrify means China is already the world’s largest maker and seller of EVs, accounting for more than 43 per cent of global EV production and 40 per cent of the EVs sold in 201610&11.

This is in stark contrast to the other regions, according to Rovelli. “Most Americans, outside California, don’t care about EVs, being more interested in sports utility vehicles,” says Rovelli. “Tesla is a niche product attracting a small group of enlightened buyers, while consumer demand for EVs in Europe has yet to take off strongly.”

Chinese players accelerating fast

Ana Nicholls, lead automotive analyst at the Economist Intelligence Unit, is positive on the long-term prospects for China’s carmakers in the EV sector, believing they are catching up fast with Western rivals in terms of innovation.

“Just like the Japanese and the South Koreans in their time, China has focussed on the bottom end of the market but they are already benefiting from transfer technology,” Nicholls says.

Warren Buffett has invested heavily in the Chinese battery and electric car maker BYD, which has a 50:50 joint venture (JV) with Daimler to produce luxury EVs 12 & 13.

GM has a long-standing JV with SAIC, and in September the companies announced that 10 new EVs would be produced in China by the end of the decade 14. Meanwhile, BAIC announced an agreement with Daimler in July to produce EVs in China15.

Tesla is also expanding in China but has chosen to set up its own manufacturing plant rather than work with a Chinese partner. The electric car maker announced in October that the plant would be established in Shanghai’s free-trade zone and would ultimately produce around 200,000 vehicles per annum16&17.

Deep data mines

China also has big ambitions in other linked developments in the global auto industry, namely self-driving cars and ride-sharing, also known as shared mobility.

Big data is key to self-driving cars. Sensors in the vehicles constantly gather information to control their position, speed and direction, allowing them to respond to dangers.

Firewalls block US big data leaders such as Google and Facebook from the Chinese market and Beijing is seeking to develop its own national and ultimately global champions in this area, says Rovelli.

China is well placed to take a global lead in self-driving cars, according to Xiaoyu Liu, emerging markets and Asia Pacific equities portfolio manager at Aviva Investors. “China has huge advantages over western countries in terms of gathering data given different privacy rules,” she says.

Three of China’s biggest technology companies, Baidu, TenCent and Alibaba, all have ambitions in the self-driving sector.

“These companies are the main players in big data in China, have massive resources, are cash rich and can afford to invest heavily in this area,” says Nicholls. “Baidu’s Apollo project is effectively an open-source self-driving platform and the company is giving the software away free so carmakers can develop their own self-driving technology.”

While self-driving cars are currently prohibited on public roads, the government is reportedly considering allowing car companies to conduct tests 18.

China also has advantages over the US and Europe in terms of scalability and speed of automation, which could give the country a competitive edge in self-driving cars in the global market, argues Rovelli. The country’s 730 million internet users generate a vast amount of data19.

“The more data that is available, the more artificial intelligence algorithms learn, speeding the development of self-driving technologies that rely on these algorithms,” says Rovelli.

Ride-sharing EVs

As for ride-sharing, Rovelli cites DiDi Chuxing, which acquired Uber’s Chinese business in August 2016, as a possible global winner. DiDi is involved in investment and technology partnerships with seven global ride-share companies, including Lyft, Grab, Ola, Uber, 99, Taxify and Careem20. It is also the world’s largest EV operator, with 260,000 electric cars on its platform21.

China has already developed pioneering business models in bicycle-sharing that could transfer into the auto sector. “The data-tracking measures on the bikes generate data such as commuting habits, rental history and creditworthiness that would be very valuable to car ride-sharing operators,” Rovelli says.

History repeating

In the early 1970s, few people regarded Japanese cars as a serious threat to established players such as Ford and GM. Yet within a decade Japanese cars had established such a strong reputation for reliability and engineering excellence that the survival of Detroit’s auto titans came under threat. South Korea and the Czech Republic provide more recent but equally dramatic examples where the fortunes of domestic carmakers have been so transformed they have entered the premier league of global automakers.

China appears ideally placed to be the next disruptor to the global auto industry given its many innate advantages among EVs, ride-sharing and self-driving cars, the sometimes entwined themes that promise to revolutionise the sector. This is particularly true in the latter two markets where unfettered access to big data could give it a huge advantage in developing the artificial intelligence required by self-driving cars. Moreover, the knowledge China gains in this area could well allow it to launch an assault on other industries.

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Important Information

Unless stated otherwise, any sources and opinions expressed are those of Aviva Investors Global Services Limited (Aviva Investors) as at 27 November 2017. This commentary is not an investment recommendation and should not be viewed as such. They should not be viewed as indicating any guarantee of return from an investment managed by Aviva Investors nor as advice of any nature. Past performance is not a guide to future returns. The value of an investment and any income from it may go down as well as up and the investor may not get back the original amount invested.

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Contributors include:

Alessandro Rovelli

Senior Credit Research Analyst

Main responsibilities

Alessandro is responsible for conducting credit analysis on global credit portfolios, with a specific focus on global commodities.

Experience and qualifications

Alessandro joined Aviva Investors from Deutsche Bank where he was a portfolio manager in the Loan Exposure Management Group. Prior to Deutsche Bank he worked with UBS as a research analyst. In his time at UBS his team was ranked number 1 by Institutional Investor for their specialised research report publications containing fundamental, relative value and trading ideas for bond issuers in the Telecoms sector.
Alessandro has an MBA in Analytical Finance and Accounting from the University of Chicago, Booth School of Business.

Xiaoyu Liu

Prior to joining Aviva Investors, Xiaoyu worked for JP Morgan Asset Management where she covered all sectors as an analyst focusing on small and mid-sized companies across Asia. She progressed to this position after working there as a sector specialist covering the Technology, Telecoms and Industrial sectors. Before this, she worked for UBS as part of their Global Equity team.
Xiaoyu graduated from the Renmin University, China, before obtaining her Master’s, and subsequently her PhD, in Economics at Birmingham University. She also holds the UKSIP Investment Management Certificate and is a CFA charterholder.